IPART’s review of CityRail’s regulatory framework – stakeholder roundtable

31 July 2008

Roundtable format

1.40 – Part 1: Approach to determining CityRail’s revenue requirement

2.10 – Part 2: Value of assets, costs and revenue 3.00 – Part 3: External benefits and funding 3.50 – Part 4: Fare structure 4.40 – Closing statements

Part 1: Approach to determining CityRail’s revenue requirement – IPART preliminary views

The building block approach to fares best meets objectives

This involves : adding up all the costs to work out how much

revenue CityRail needs, then working out how much of this revenue should

come from train users and how much from taxpayers

Part 1: Approach to determining CityRail’s revenue requirement - Advantages of proposed approach

Encourage better spending decisions by: Better forecasting and management of costs Clearer performance objectives and reporting Setting criteria for making sound investment

decisions Making a link between CityRail’s revenue

requirement, its spending and the fares it collects

Part 1: Approach to determining CityRail’s revenue requirement – what it costs to provide CityRail services

2008/09 2009/10 2010/11

2011/12

Revenue requirements (Epping Chatswood Rail Link valued at zero)

$2.1 billion

$2.3 billion

$2.4 billion

$2.5 billion

Revenue requirements (Epping Chatswood Rail Link valued at $2.3 billion)

$2.2 billion

$2.6 billion

$2.7 billion

$2.8 billion

Part 1: Approach to determining CityRail’s revenue requirement – timing of determination and fare changes

Fare determination for 4 years – 2009 to 2012 Longer determination will:

Encourage efficiency Assist long term planning Provide budget certainty Allow passengers to see how fares will change

over time Fare could change on 1 January or 1 July each

year – 1 January would align with bus and ferry fare changes

Part 1: Issues for discussion

Is there support for the building block approach? Should the determination run for 4 years – or a

longer or shorter period? Should fare changes happen at 1 January (the

same as buses or ferries) or is it better to change rail fares at 1 July to match financial year reporting?

Part 2: Value of assets, costs and cost efficiency – Asset valuation

CityRail’s assets should be valued using a ‘deprival value’

IPART estimates that this year, CityRail’s assets are worth $1.4 billion – significantly less than the $11.3 billion included in RailCorp’s accounts

Part 2: Value of assets, costs and cost efficiency – total costs

RailCorp forecasts operating and maintenance costs to increase from $1.8 billion in 2006/07 to $2.6 billion in 2011/12 – or 7.7% per year

Based on what similar operators do, LEK Consulting found that efficient operating and maintenance costs should be $2.2 billion by 2011/12 – a 3.5% rise per year

LEK found cost savings worth 18% or nearly $500 million in 2011/12

One-off capital expenditure of $780 million is needed to achieve LEK’s cost savings

Part 2: Value of assets, costs and cost efficiency – LEK recommended operating costs

Cost category RailCorp’s forecast cost

LEK’s efficient cost

Size of savings

% saving

Infrastructure maintenance

941 876 65 6.9%

Rolling stock maintenance

380 324 56 14.8%

Train operations and crewing

494 328 166 33.5%

Customer interface

480 394 86 17.9%

Revenue Collection

64 35 29 45.0%

Overhead and marketing

295 209 86 29.1%

Total 2655 2167 488 18.4%

Part 2: Value of assets, costs and cost efficiency – LEK recommended operating costs

LEK’s cost savings included transitioning to train operations without train guards as well as reduced staffing at low patronage stations – these are policy matters

If these savings are not made, fares will need to rise by an extra 1.5% per year to cover the additional costs

2008/09

2009/10

2010/11

2011/12

LEK’s recommendation

2,163 2,239 2,207 2,167

Train guard savings

0 23 82 121

Station staffing - 19 20 37Total 2,163 2,281 2,308 2,325

Part 2: Value of assets, costs and cost efficiency – LEK recommended capital costs

LEK did not identify capital cost savings One-off capital expenditure of $780 million is

needed to achieve LEK’s cost savings

2008/09

2009/10

2010/11

2011/12

Efficient capital expenditure

1,101 1,404 1,330 1,110

Epping to Chatswood Rail Link

2,300

Part 2: Issues for discussion

Is IPART’s asset valuation of $1.4 billion appropriate for fare setting purposes?

Should the Epping to Chatswood Rail Link be valued at $2.3 billion? If not, why not?

Are LEK’s cost savings achievable? Government policy related to rail (guards and

staff at smaller stations) may require an extra $300 million or 6% higher fares over the next 4 years – are passengers prepared to contribute to these

costs or should they be borne by government?

Part 3: Who should pay for CityRail

CityRail benefits everyone, not just rail users CityRail users benefit directly, while the wider

public benefits through reduced congestion, greenhouse emissions and road accidents

Rail users and taxpayers should share the funding of CityRail

IPART sought advice from CRAI on the benefits to non-rail users

the benefits are considerable: CRAI says $1.1 billion in 2006/07, mainly through

reduced traffic congestion IPART estimate is higher – around $1.6 billion in

2007/08 and between $1.7 and $2.0 billion in each of the next 3 years

Part 3: Who should pay for CityRail

To determine how much is paid by passengers and how much by taxpayers IPART intends to use information on:

benefits to non-rail users affordability impact on passengers

Other options are:1. Set the taxpayer share equal to the benefit to

non-rail users2. Use the optimisation approach developed for

IPART by CRAI

Part 3: Who should pay for CityRail – IPART’s preliminary view

Passengers should pay 30% - slightly more than they currently pay

Taxpayers should pay the remaining 70% This means that passengers face fare increases

of 20% to 30% over the next 4 years - plus any increases needed to cover inflation

Part 3: Issues for discussion

Is the range of $1.7 – 2.0 billion a good estimate of the value of CityRail to the wider public?

Is it reasonable for CityRail passengers to pay 30 per cent by 2011/12?

IPART’s preliminary views may mean large fare increases. Is this a reasonable balance between passenger and taxpayer funding? If passengers pay less, taxpayers will need to pay more

How should IPART take into account affordability issues?

Part 4: Fare structure

Strong growth in the number of people travelling in peak times is affecting crowding, reliability and costs

The level of fares at different times of the day is likely to have some effect on how many people travel in peak and off-peak times of day

IPART is considering: how peak and off-peak fares should be set whether the current off-peak discount of 30% is

sufficient to encourage some people to alter their travel time decisions

if other factors like train frequency affect the times people travel

RailCorp is trialling a 50% off-peak discount on some lines to spread demand and reduce peak crowding

Part 4: Fare structure

IPART’s preliminary view is that fares should include a flag fall and a per kilometre rate

This could involve either a fixed per kilometre charge or one that decreases with the distance travelled depending upon CityRail’s cost structure

A distance-based fare structure matches the fare structure for the most of CityRail’s current tickets

Other options are:1. Flat fares2. Zone based fares

Part 4: Fare structure

Currently the discount on weekly and other periodical tickets varies with the distance travelled Smaller discount for shorter distances and larger

discount for longer distances For example, a weekly commuter from Burwood to

the City receives a discount of less than 20% while a commuter from Wollongong receives a discount greater than 40%

IPART is not convinced that this is equitable IPART considers that a consistent discount

should apply

Part 4: Fare structure

Moving to IPART’s preferred fare structure should have only a small effect on single and return tickets

But applying a consistent discount of around 20% on weekly tickets suggests that: Shorter distance commuters will see a lower price Longer distance commuters would see substantial

increases Large fare increases are not desirable - they

affect both affordability and patronage IPART will consider these issues when

determining how to move fares to its preferred fare structure

Part 4: Issues for discussion

Is a distance based fare the best approach – why or why not?

How would electronic ticketing affect the decision on what is the best fare structure?

For weekly/periodical tickets, should everyone get the same percentage discount? Is 20% a suitable target?

What is the right method of pricing Zonal tickets – like TravelPasses?

What discount would encourage people to change their travel time to off-peak times of day? What time limits should apply to off-peak discounts?